You bet a set amount of money on a stated outcome at stated odds: £10 on a horse to win @ 3-1, £20 on a team to score first @ 5-4. Then lose. This is known as money-line betting. You bet on the number of horses to finish a race – more than 15, or the number of goals in a game – less than 3. Then lose. This is spread betting.
Spread betting is based on the statistical analysis and applications of set odds; in essence it is the first differential of betting. Most gamblers will have come across spread bets in their average bookmaker experience as mentioned above. On any indefinite outcome in which there can be a spread of possible outcomes there can be spread betting. The number of throw-ins in a football match, the number of no-balls bowled in a cricket test etc. In the UK a market will be created – a bookmaker believes that there will be 100 yellow cards in the World Cup for example. A punter will then buy this number at an agreed price, e.g. £50. If there are more than 100 yellows the punter will make £50 per card more but will pay £50 for every card fewer. This is the main difference – there is no limit (within statistical probability) to how much a bookmaker/punter can win or lose.
Whilst most people will have come across spread bets in sports related gambling their popularity grew in the UK in the financial markets of the 1980s. The main reason for this was their lower level of regulation in relation to standard investments on the stock exchange. In effect the spread bet is off-exchange with the contract existing solely between the market maker and the bettor.
Though it can seem initially confusing financial spread betting can be best described as a half-way house between normal financial investing and normal gambling. Both sides are exposed to more risk yet both sides can stand to lose less if incorrect in their initial presupposition.
A spread bet can also be open ended. If you were to bet £50/point on a certain share trading above its offer price of 500p you would receive a return on this for every point that it made higher than 500p. The market-maker charges a financing cost to provide this service (or pays if the bettor is shortening the price) which is generally around the 0.5% - 1% above the London Interbank Offered Rate. This is, in effect, their commission. Assuming the market they are selling/buying at is accurate there should be as many gainers as losers – their losses are covered by their gains but their profit comes from the financing cost.
Any prospective losses must also be covered by the account of the bettor up to a certain percentage (generally 5-10% of the total exposure). The advice for financial spread betting would be to have confidence in the continuation a general trend and to pay the market maker for the provision of an arena in which you can return a profit for this belief. To do this professionally requires great deal of knowledge but a once in while punt for the average investor can add a certain piquancy to investing. Spread betting is still betting; you may find football stultifying. Put £100 on it, though and it suddenly becomes far more interesting.
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